Currency Watch: The calm after the storm

The “normalisation” of financial conditions in the Eurozone that we have seen since the summer of last year remains encouraging, and the euro is stronger as a result.

We saw this week how a bill sale of German one-year debt returned a positive yield for the first time since June last year.

This means that for the past seven or so months investors have still been paying Germany to invest in German debt; the fear of losing large amounts of money elsewhere was so great that losing a small bit of money was preferable. This week that reversed to normality.

Likewise, the yield on US Treasury debt payable in 10years rose back above 2% for the first time since April, another indicator that investors were rotating out of their safe-haven holdings and into a more risk comfortable allocation of resources.

As I have said previously these moves should not be confused with a weakening of the crisis; more a switch from the near-term acute pain of a sovereign crisis to the chronic ache of a growth problem. This does mean that we are still seeing rising equity markets and record prices while the underlying growth remains as a myth.

On the UK, Sterling markets had positioned for a weak figure and a weak figure is what they got. I can’t understand the surprise however. PMI surveys from businesses in manufacturing, construction and services all averaged in contractionary territory through the last three months of the year while current account figures last week emphasised a slowing of international trade.

Consumer spending, or the lack thereof, can be summarised by the recent high-profile High St closures with a low spending Christmas unable to prop up companies that have been forced to cut prices through the year to combat low demand.

It is likely that this will be the final straw for our AAA credit rating and we expect a downgrade by at least one agency by the end of Q1. The impact of this is more political than anything however, and we emphasise that a downgrade will not prompt a “sterling crisis” or a crash in gilts. In fact we look at it as a positive as it alleviates one form of short-term uncertainty that has plagued GBP for the past few months.

Our GDP estimate for 2013 as a whole remains unchanged following this number at 0.6%